My data consist of monthly electricity futures contracts. Unlike other commodities, electricity is delivered throughout a month (rather than on a specific date), which means that, as the active month elapses, the price of the electricity contract converges to the monthly average. Unfortunately, however, volatility is not monotonic: it is initially low, due to a lack of trading volume, accelerates as a contract becomes increasingly active (much like with other commodities), and finally decreases as the active month elapses.

My question is: how can one model such a market? Sources I've encountered advise against (p, d, q) > 2, which would be necessary for modeling non-monotonic volatility, which leads me to think that ARIMA-GARCH is unsuitable here.

Thank you for your patience and assistance!


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